For a lot of growth corporations, high rates of interest have proven to be a drag on their earnings, but that has not been the case for CME Group (NASDAQ:CME), which runs the world’s largest derivatives marketplace.

The operator of the Chicago Mercantile Exchange, Chicago Board of Trade and Recent York Mercantile Exchange posted record ends in 2023, largely attributable to a surge within the trading volume of interest-rate products.

The stock was up almost 4% on Wednesday to $215 per share, lifted by its record results and better-than-expected earnings. Here’s why it did so well.

Record-setting yr, driven by uncertainty

CME Group’s record-setting yr was capped off by a fourth quarter that saw its revenue climb 19% to $1.439 billion and net income jump about 28% to $815 million, or $2.24 per share.

For the total yr, the firm had record revenue of $5.6 billion, up 12% yr over yr, while its net income was $3.2 billion or $8.87 per share, up 18.5%. On an adjusted basis, CME Group’s net income was $3.4 billion or $9.35 per share.

The firm’s revenue was juiced by a record average day by day volume (ADV) of 24.4 million contracts trading on its platform last yr. The fourth quarter saw an ADV of 25.5 million contracts, up 17% yr over yr. The ADV within the fourth quarter was the best ever for a Q4 and 33% greater than the recent five-year average for a fourth quarter.

While CME Group had double-digit ADV growth in 4 of the six asset classes on its platform, interest-rate products were by far the most important. CME Group is the most important marketplace for interest-rate derivatives trading, so in a yr when rates of interest were on the rise, trading volume also rose.

Within the fourth quarter, the ADV of interest-rate products spiked 36% to 13.3 million contracts, the best 4Q ADV on record. The majority of that was in Treasury futures and options, as ADV there climbed 44% to a record 7.7 million.

While rising rates of interest actually led to a rise in trading volumes, CME Group chairman and CEO Terrence Duffy explained that it is basically the uncertainty that drives volumes.

“In my 40+ years within the industry, I’ve observed that no matter whether rates are going up or down, our volumes are typically higher in periods when the change of rates is uncertain, as is the case today,” Duffy said on the Q4 earnings call. “I’ve never seen such a disparity in opinions on what the Fed may or may not do, and I feel that may be a tailwind for CME Group and our rates products.”

Duffy elaborated on this “age of uncertainty” by saying that interest-rate volume was up 16% in the primary half of 2023 with 4 interest-rate hikes. That pace accelerated within the second half of the yr, when there have been no rate hikes, because the rate of interest ADV was up 24%.

More uncertainty ahead

Thus, while rates of interest are expected to return down in 2024, much uncertainty stays concerning the economy, inflation, the Federal Reserve and the direction of rates of interest. This could bode well for CME Group.

Actually, the uncertainty has already resulted in a record January, with ADV of 25.2 million contracts up 16% from the previous January. The ADV for interest-rate products was 13.1 million, a January record.

“All that being said, 2024 remains to be very much within the Age of Uncertainty and our products remain critical risk management tools for our customers,” Duffy said on the decision.

CME didn’t offer any revenue or earnings guidance within the presentation, but it surely does expect $1.585 billion in adjusted operating expenses, up barely from $1.526 billion in 2023, and full-year capital expenditures of $85 million.

Nonetheless, based on its very reasonable valuation with a price-to-earnings (P/E) ratio of 24 and a forward P/E of twenty-two, coupled with continued uncertainty and punctuated by its record January volumes, CME Group must have one other strong yr in 2024.